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Q2: Colson Corp. had $900,000 net income in 2018. On January 1, 2018 there were 600,000...

Q2: Colson Corp. had $900,000 net income in 2018. On January 1, 2018 there were 600,000

shares of common stock outstanding. On March 1, 400,000 shares were issued and on September 1, Colson bought 100,000 shares of treasury stock. The tax rate is 40%.
In addition, Colson issued $2,000,000 of 6% convertible bonds at face value during 2017. Each $1,000 bond is convertible into 100 shares of common stock. No bond was converted into common stock in 2018.
Required:
a) Compute basic earnings per share for 2018.
b) Compute diluted earnings per share for 2018.

(please type the answer)

Solutions

Expert Solution

a) The basic earning per share is calculated as follows:

Basic EPS = Net income / Weighted average number of share outstanding

= $900,000 / 1,000,000 shares

= $0.90 per share

Where,

Weighted average number of share is calculated as follows:

Type Period of holding No of months Proportion No of shares Weighted average shares
Common stock 1/1 - 31/12 12 Months 12/12 6,00,000 600,000
Additional shares 1/3 - 31/12 10 Months 10/12 4,00,000 333,333.3333
Treasury stock 1/1 -31/8 8 Months 8/12 1,00,000 66,666.66667
Weighted average shares 1,000,000

b) The Diluted EPS is calculated as follows:

Diluted EPS = Diluted Net  Income / Diluted shares

= $972,000 / 1,200,000 shares

= 0.81 per shares

Where,

Diluted income = $900,000 + ($2,000,000 * 6% * 60%)

= $900,000 + $72,000

= $972,000

Diluted shares = 1,000,000 shares + ( 2,000,000/1000 * 100) shares

= 1,000,000 shares + 200,000 shares

= 1,200,000 shares

ekkarill92 answered 8 months ago
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